Sunday, April 13, 2014

Big Look at IPO Business -- Trading Initial Public Offerings

When you pull back and take a historic trading look at the IPO market over decades you start to realize that initial public offerings are usually in two modes:

One, cannot give them away.

Two, feeding frenzy. 

When the IPO market is down, investment bankers are working overtime to try to push the stock out the door.

When it is up, you get phone calls from people you don't know but are the friend of a friend of a client, and they say "I hear you can get IPOs for me." When you say yes, they say "Put some in my account." 

Naturally, you ask "Don't you know what are buying?" 

The response is in the negative, the new account just wants IPOs.

That my friends is an indicator of the peak of an IPO boom.

The other indicator when deals start to come to market and drop. 

The market is in heat, booming and all of a sudden the first deal drops below the issue price. 

The smart players then avoid IPOs. 

So what is happening now? I give you the KING, plunged 16 percent in its debut last month even after pricing its shares at a discount to gaming peers. That was your first clue. 

Ally Financial Inc., the auto lender, came at $25 and dropped to $24, 

There are more signs of softness and there are one or two going to premiums still. Even if the IPO business runs into the woods, there will always be deals going to premiums. 

The problem is that you have no way to separate the good from the bad. 

In my decades of experience, the IPO market has never temporarily gone soft and then come back a month later. It is up or down and that's it. 

Imagine being stuck in an IPO that came at $25 and in just the first few days sells at $24. What do you think comes next? 

Now for you short sellers . . . . you will find underwriters bidding for large blocks of stock to keep the market artificially high as the stock trades on high volume to let you lay out large positions and the new holders can be easily discouraged if they are flippers hoping for a fast hit. When the underwriter pulls away, the bombs fall. 

We note that Wall Street is a one way street. 

For companies, if you want to win, be brave enough to file your IPO early, even if the market is soft. Then when it heats up, you go effective and sell into the feeding frenzy. 

Thursday, February 6, 2014

TWTR decline - a lesson in trading

Twitter  -- TWTR -- is now $50 closing near its low, down 24%.

Chart courtesy of

As we told you earlier, the stock was overpriced.  Overpriced stocks are vulnerable to horrific down moves.

That is one big lesson here, but there is more.

The next lesson is that looking at the chart will do you no good until you have looked at the fundamentals. When you look at the fundamentals, you know the stock is overpriced. You know you are tempting fate to stay long, but you should not be long, you should be short if anything, right?

You can take a look at the news, and it tells you that TWTR beat earnings and revenue predictions, but subscriber growth shot TWTR down. 

So that lesson is overpriced stocks are vulnerable, even if they exceed earnings and revenue expectations.

The other lesson with regard to IPOs, and this is why short sellers do love them so, is that the smart company goes public when the growth curve starts to slow down. 

Growth is the hot button for IPO (and other) stocks. Investors get hypnotized by growth more than any other factor.  They buy IPOs that have histories of fast growth and prospects of more of the same. 

But as an underwriter, I tell a company not to go public until they can see that the growth is going to slow down. Why share all that tasty growth with the public?  So IPO companies, smart ones, often sell at the peak. 

Short sellers, smart ones, figure out who is peaking and who will show slowing growth in the after market, and they pick an entry point for their short sale. 

At three lessons here: (1) fundamentals over all, (2) technical or chart analysis is worthless without know which way the wind is blowing from looking at the fundamentals, (3) overpriced stocks are easily knocked down, and (4) IPO companies often go public when growth is peaking or at least slowing.  OK, that's four lessons, enjoy. 

Hope this helps you see the broader picture. 

Wednesday, December 25, 2013

Twitter TWTR closes near $70. Why?

Now on Christmas Eve, Twitter closes at $69.96. 

It is said that people have no idea why Twitter's stock is moving up. 

Chart courtesy of  

The stock is exceeding expectations by a huge degree. 


Various commentators are making guesses as to the cause.  

I love it when commentators look at price moves and then survey a list of reasons and pick one. How in the world do they know which reason is right? How do they know the right reason is even on their list? They are guessing and trying to make you believe, as they do, that they know what they are doing. For sure they have not talked to every buyer in the stock, right?

Here is my view. In the stock market, you most investors and traders necessarily have imperfect information. The market will transfer money from those who don't know to those who do. 

By the time those who don't know find out, it will be too late for them to act as the information will be reflected in the price.

Therefore, when you see the price move like TWTR, you know that you don't know. If you are long such an overpriced stock, you wait for the stock to either slow and break the uptrend line to make a huge spike up in a reversal pattern. Otherwise you ride the wave. 

If you want to short such a stock, you had better be damn sure the uptrend is dead and even then think twice. 

The chart will tell you what is going on. 

Price moves are their own advertising. You want buyers in a stock, push the price up. You want sellers, push the price down. This is why bear raids work. 

Be patient. Sooner or later some of those insider and pre-IPO investors in TWTR will be tempted to take profits. The stock will become soggy as the buyers eat all the sellers' stock and cannot find a bigger fool to sell to. 

Remember pendulum theory. The more the stock swings up, the more it will swing down. 

Sunday, December 22, 2013

IPO Supply and Demand

We all can see that the IPO market is better than ever. 
Many companies are going to huge premiums. If you are an IPO investor, and even if you are not, do not you want to get in on this gravy train? it is like free money, right?
Buy in the IPO and flip in a few days for a 50% profit!!
This starts an investor stampede into IPOs.
I recall one year when the IPO market was in frenzy I got a call from an investor unknown to me and referred by one of my clients. He screamed into the phone, demanding I put IPO into his account. When i asked him what he was looking for, he said he did not care, he just wanted "IPO."
Naturally, I knew the end of that initial public offering bull market had been reached. 
What you then see is a ton of companies filing for public offerings with the SEC. The glut comes to market and soaks up all the money for IPOs. The result is soft prices, offerings going below the offering price, and eventually hurt investors not interested in public offerings for the next few years until the cycle turns and the game is on again. 
Is that happening how? There are now over 50 tech companies, 50 consumer products companies and 30 health care firms filed for IPOs.  The healthy premiums in a number of recent deals, e.g. Twitter, which went up even more after jumping to a huge first day premium, cause investors to salivate with greed. 
Maybe not in January, but certainly 2014, the wave will crest and the market will peak. 
Investors and investors are well advised at some point to take their winnings and head for the beach, leaving the game to shorts.
It is a cyclical business. 

Monday, December 9, 2013

TWTR Takes Off

Twitter soared today, blowing through any resistance at $46. 

Most analysts are unenthusiastic about TWTR's price, as am I. 

TWTR is 21 times its estimated 2014 sales of $1.1 billion while Facebook is priced at 11 times  sales.

Nonetheless, I wise trader does not argue with the market and is out of any short position as soon as the resistance price is broken.  

A stock in motion tends to stay in that motion. 

Look at the volume today. It is increasing on the up move, a convincing sign.

Chart courtesy of 

When you are operating on one theory and the theory is violated by the market, just close our your position. 

The majority opinion on Wall Street is that Twitter is overpriced. I share this opinion. 

The market disagrees. The market always wins these discussions as it pretty much ignores my opinion, right or wrong. 

I have learned not to argue. 

Saturday, November 30, 2013

Twitter Valuation

When an investment banker evaluates a company for an IPO, he will make a table showing the relative valuation of the stock compared to like companies.

Recently, social media companies have made popular initial public offerings.

Forbes posted such an evaluation including TWTR.  You will find it here.

This is a very well done analysis.

If you look at the table given, you will see that TWTR has a valuation behind Facebook and LinkedIn.

While Twitter's market cap is almost that of LinkedIn, its revenues are only a fraction of LinkedIn.

While TWTR's revenue per member is half of Facebook and LinkedIn, its market cap per member is about that of Facebook and LinkedIn.

This chart tells us that TWTR has the highest valuation of the eight social media stocks listed.

However, the most important factor in such a chart is missing. This factor is growth. Growth juices investors more than anything else. It should have been one of the first factors listed.

We suspect that those who are paying up for TWTR stock are motivated by its growth potential. They argue that TWTR has a huge market left, and that it will be able to monetize that market and that the revenues will accelerate.

Frankly, I regard paying up for growth to be one of the most risky things you can do. Sooner or later competition shows up to curb your growth. Sooner or later your markets are saturated.

If the company releases its sales and earnings and the growth is suddenly, unexpectedly slowing -- not declining, just decelerating -- the stock will suffer great and rapid pain as the market re-evaluates the multiples used to compute price.

Such a stock could lose one-third of its market value in one day.

Only someone with a working crystal ball can confidently predict growth.

As it is, we still do not see the upside in Twitter at this valuation.

Monday, November 25, 2013

TWTR Aftermarket

Here is today's chart for the Twitter IPO:

Chart courtesy of 

As expected, TWTR broke its $40 support level. Volume is up. We would expect some selling momentum to develop.

We do not expect the underwriter to support the stock this far above the offering price. The underwriter's duty is to the IPO buyers, not those who bought much higher up.